I'm a thirty-year veteran of Wall Street and an outspoken critic of ineffective regulation and an advocate for economic and political sanity. Following a career as an in-house lawyer and industry regulator, I am now in private practice representing member firms, registered persons, Whistleblowers, and defrauded investors. I publish the RRBDlaw.com and the BrokeAndBroker.com websites.

On the One Hand

On the one hand, NASAA issues an absolutely valid, worthwhile, and intelligent warning:

Following the Federal Reserve’s announcement that interest rates are expected to remain low until at least late 2014, the North American Securities Administrators Association (NASAA) today cautioned investors to beware of risky or outright fraudulent investments promising higher yield or returns.

That’s truly great advice – and couldn’t be more timely! Kudos to the state and provincial regulators at NASAA!

With interest rates barely in the single digits and likely to stay there for some time, a lot of folks are antsy. If you factor in a modest degree of inflation, some fixed income products are actually losing ground and technically costing you money to own them. The problem with that somewhat dicey logic is that you then have to consider whether there is a safe alternative to earning a pittance on your bonds or similar investments. In anticipation of such investor ruminations, NASAA offered this quote:

“Investors running away from low yields on fixed investment products risk stumbling into the arms of unscrupulous salespeople promising low risk and high returns,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities. “Don’t chase the offer of high yield or returns into a dead-end investment.”

Herstein said that state and provincial securities regulators are concerned that individuals who depend on fixed income investments, particularly seniors, may be tempted to turn away from their slower growing but safe investments to alternative investments without understanding the risks and terms.

Ready for Pluckin’

There are always “alternative” investments but that doesn’t mean the alternatives are safe or safer than what you presently own. Whether you invested the big bucks through Goldman Sachs, JP Morgan, Citigroup, or Wells Fargo; or you handled your own investment decisions online at Schwab or E*Trade, it just doesn’t matter. When investors look at the miniscule number to the left of the % sign, they go ballistic. Be careful, though, because when you’re angry about your investments, that’s when you to tend to get impulsive and make rash decisions that you often come to regret.

After some 30 years as a lawyer handling all sorts of legal disputes on Wall Street, I’ve learned that there are few chickens more easily plucked than investors who are unhappy with low rates of return. Disgruntled investors are predisposed to believe almost any garbage – particularly when it’s too good to be true. As such, heed NASAA’s and Herstein’s warnings.

On the Other Hand

On the other hand, having sounded the fire alarm, NASAA then answers investors’ 911 calls with the regret that there aren’t enough firetrucks presently available. Here’s how NASAA puts it in its press release:

Before purchasing any investment, NASAA reminds investors to ask the following questions:

Are claims made for the investment realistic? Use common sense and get a professional, third-party opinion when presented with investment opportunities that seem to offer unusually high returns in comparison to other investment options.

Has the seller given you written information that fully explains the investment? Request written information that fully explains the investment, such as a prospectus or offering circular. The documentation should contain enough clear and accurate information to allow you or your investment adviser to evaluate and verify the particulars of the investment.

Are the seller and investment licensed and registered in your state? Call your state or provincial securities regulator to find out. If they are not, they may be operating illegally.

Having conceded that investors with low return rates are susceptible to being fleeced by scamsters, NASAA’s best suggestion is to “use common sense and get a professional, third party opinion . . .”? I mean, really? That’s the gem we get from the accumulated wisdom of every state, territorial, and provincial securities regulator? As if any future patsy ever exercised “common sense.”

Then there’s that truly dubious suggestion of getting “a professional, third party opinion.” Just exactly to whom are these agitated and unhappy investors going to turn for this opinion? NASAA must know that a reputable professional can’t promise a dramatically higher rate of return for a comparable interest-dependent investment; however, there are lots of fraudsters masquerading as supposedly professional opinion givers who would just love to pitch their bogus products to these folks looking for higher rates.

With a 10-year Treasury note barely yielding over 1.8% and the 30-year bond dancing around 3%, what is the comparable alternative offering similar relative safety?

I’m sure that some hot shot financial guru out there is going to urge me to buy 10-year Greek debt or 30-year Portuguese.

And lets not forget all those so-called, self-proclaimed professional, third parties who, as we speak, are trying to persuade grandma and grandpa to sell their govies, max out a reverse mortgage, and go for the higher yields of some toxic private placement or bogus business opportunity.

Wall (Street) Paper

Sadly, NASAA retreats to that old, tired saw, which has sadly become the redoubt of most career securities regulators: Give ‘em lots of paper to read!

The theory – which I view as discredited – is that the best way to achieve the goals of regulation is to paper the bastards to death with reams of supposed disclosure documents riddled with legalese and cloaked in subterfuge. While I appreciate that NASAA urges investors to seek out “clear and accurate information,” that goal remains more aspirational than realistic.

Since 1933, we’ve had a federal securities act that was designed to achieve the goal of meaningful disclosure. Nearly four score years later, I don’t know of any credible Wall Street regulatory professional who would truly argue that we have a system of disclosure documentation that is “clear and accurate.” So why do regulators pretend otherwise — and why do Wall Street’s cops send investors on such a wild goose chase?

Hit 1 To Continue In English

Finally, we have that lovely NASAA suggestion that investors should call their state regulators to find out if those trying to defraud them are registered or licensed in the jurisdiction. Ummm, my good men and women at NASAA, any of you ever pick up a phone, you know, lately, and tried to get a human being at your bureau or division?

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